Eliminating the MBT completely and offsetting it with spending cuts would create a conservatively estimated 120,000-plus jobs by 2016, analyst testified today during state Senate Finance Committee hearing

MIDLAND — Michigan would improve its corporate tax ranking from 48th to 22nd in the Tax Foundation’s index by replacing the Michigan business tax with a flat corporate income tax, Mackinac Center Director of Fiscal Policy Michael D. LaFaive said today during testimony before the state Senate Finance Committee.

At LaFaive’s request, the Washington, D.C.-based Tax Foundation calculated Michigan’s rank based on a proposal by Gov. Rick Snyder to replace the MBT with a flat corporate tax. Even without factoring in the possibility of a tax cut, the Tax Foundation reported that Michigan would significantly improve its ranking, LaFaive told senators during a hearing on the MBT.

“Without even reducing the annual revenue haul, just switching to a simpler business tax — one that doesn’t impose an annual liability even if your business loses money — moves Michigan out of the basement on this important measurement,” LaFaive testified. “The large leap is explained by the fact that maintaining a gross receipts tax counts heavily against a state’s ranking.”

But the state should go even further, eliminating the Michigan business tax altogether and replacing it with spending cuts, LaFaive told the committee. An economic model run by the Mackinac Center revealed that eliminating the MBT would create a very conservatively estimated 120,000-plus net new jobs in Michigan through 2016, even if the state makes no other changes to improve its business climate, he said.

“If Michigan can vault 26 places in this ranking by just adopting a simpler tax, imagine the impact if we eliminated the business tax altogether and replaced it with nothing,” LaFaive said. He pointed out that the top states in the Tax Foundation’s overall ranking are ones that do without one of three major taxes: corporate, personal income or sales.

A Mackinac Center analysis of the growth and unemployment rates of the 12 states without one of the major taxes found that between 2000 and 2009, these states enjoyed average real state GDP growth of 22.4 percent, while those with all three taxes experienced only 13.4 percent growth.

The benefits of replacing or eliminating the Michigan business tax are probably understated, LaFaive said, because the models don’t capture the benefits of removing the punitive administrative and compliance costs that result from convoluted tax laws. Another benefit, he said, would be a fairer playing field for businesses, one where they’re not compelled to lobby for special tax favors to gain a competitive edge.

LaFaive’s entire testimony before the Senate Finance Committee can be found here.